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Investment advice for Ron Paul
Rocky never provides investment advice. But for once he’ll violate this rule and offer some advice to Congressman Ron Paul.
Members of Congress must file financial disclosure forms which show all of their assets and investments. Rocky studied Rep. Paul’s portfolio from 2003 to the present. http://www.legistorm.com/memberdisclosure/413/Rep_Ron_Paul_TX.html
Ron Paul’s portfolio violates every principle of sound money management. It is not prudent. It is not sensible. It is volatile. It is speculative. And it may give a window into Ron Paul’s perspective on the economy and free enterprise.
From 2003 to the present, Ron Paul’s stock portfolio owned only gold stocks. He owned some real estate. He had some cash. And he owned mutual funds that make money ONLY WHEN the stock market declines. He did not own any gold bullion. And more recently, he purchased more gold mining stocks and added to his bearish bets on the stock market using leveraged bearish funds.
In 2003, the value of his portfolio was between $860,000 and $2,300,00. (The disclosure form only provides a range of values.) In 2010, his portfolio grew to $2.4 million and $5.5 million. (Gold stocks have declined between 15% and 30% in 2011, so his portfolio has declined commensurately. He will declare that loss next year.)
So, over an an 8-year period his portfolio has appreciated by about 12%/year. (And after this year’s losses for gold mining stocks, it will be a bit less than that.)
Not so bad, eh?
Nope!
If, instead of being such a wiseguy, he had instead just purchased gold bullion, his return would have been 55% better — returning an impressive 18.5% per year! (It’s very strange that Ron Paul doesn’t own any bullion. And a skeptic might wonder whether he owns bullion, but failed to disclose it.)
[Disclosure: If one extrapolates the profile of his portfolio, one must conclude that he either nailed the bottom of the gold market, or he has really lousy long term performance. Remember that (even after this 10 year old rally) gold has appreciated at only about 5% for the past 30 years, while stocks have returned about 11%, and long bonds have returned high single digits. More troubling, however, is the notion that a President of the United States would personally profit from a DECLINING stock market and a declining economy! Even Barack Obama's assets include some S&P Index Funds....]
Why Groupon resembles a ‘roach motel’
The term Roach Motel (“where roaches check in, but they don’t check out!”) was coined by Black Flag pesticides in a decades-old advertisement. Judging from Rocky’s recent experience, Groupon membership is quite similar.
How to prepare for financial armageddon? (Bring your own socks)
In light of the ongoing European financial crisis, Rocky is pleased to learn that the European Central Bank now provides visitors to their headquarters with a “hard hat” at no cost! However, they do ask visitors to ”wear socks.”
No mention is made whether visitors must empty their pockets of spare change upon entering.
For a full text of the ECB’s dress code, see “What to wear” at:
http://www.ecb.int/ecb/visits/how/nep/html/index.en.html
Rocky’s (latest) view on gold
Knowing that he’s been a gold bull for years, Rocky’s friends keep asking: “What you do think of gold, NOW?” (These people actually think that Rocky and certain other TV commentators can predict the future.)
Rocky’s answer: “I have no idea, and have NEVER had any idea about what the price of gold will do tomorrow.”
But does he still own gold?
“Yes, and I also own some stocks. And I own some real estate. And I own some bonds. And I own a copy of last week’s People Magazine. And I have no idea what the price of these will do tomorrow either. My experience has been that pundits who claim perfect knowledge of the future are generally either liars or idiots. (Whoopi Goldberg is the exception to this rule.) What I’m doing is called diversification.”
But when will he sell gold?
“The PRICE of gold is irrelevant. As I’ve written on this blog, I will sell gold when the gold story (or more accurately, the market’s perception of the gold story) changes! Gold’s ascent is a confluence of negative real interest rates; undisciplined central bank behavior; a growing loss of confidence in government policies and financial systems; loss of Swiss bank secrecy; an accumulation of economic wealth by individuals in parts of the world without stable property rights and rule of law. Can gold drop $100 tomorrow? Sure it can! Can gold drop $300 next week? Sure it can! Can gold drop $1000 next year? Sure it can! But so long as these FUNDAMENTAL factors remain in place, the underpinnings and demand for hard assets that are beyond the reach of governments will remain.”
“Almost all of my really smart friends are very bearish right now. They all think this move is idiotic. Many think this is a bubble. And eventually they will be right. But eventually could be a really really long time. And it could include a trip to unimaginably higher prices first. Their skepticism is not predictive of anything. And importantly, they are not betting that gold will decline either. All it tells you is that they aren’t long gold and missed this move. I’ll admit that I get nervous when prices rise quickly. And historically, buying after a sharp rally isn’t a good idea. But why should any of this market chatter affect my long-term porfolio construction/diversification? After all, I’m not afraid to admit that I have absolutely no idea what prices will do tomorrow.”
[Disclosure: Rocky NEVER gives investment advice. He's owned gold for a long time. And he owns some hedges that will protect him if gold drops sharply while he's asleep. And some day, he will sell his gold. But whether it's at $2,000/oz or $10,000/oz is out of his control. It's in the control of millions of other investors around the world, and how they react to the policies of their central banks and governments.]
CPI shows women & children first?
The Captain of the Titanic supposedly said, “Women and children first!” when directing his passengers to the lifeboats.
Rocky, (hardly a chivalrous fellow), thinks recent Consumer Price Index data demonstrate “Women and Children LAST!”
He notes that women’s and children’s apparel prices are declining at a noticeably faster rate than men’s apparel prices. (See the bottom three lines of the chart above.) Although Rocky continues to wear the same ragged grey sweater and chinos, Trophy Wife may find this data to be an impetus for a visit to the shopping mall.
Rocky theorizes that women can wear men’s clothes (which support the price of shirts and pants), whereas most men wouldn’t be caught dead wearing a dress or skirt. However, if this trend continues, Rocky’s miserly nature will prevail, and he’ll try on a kilt or two.
Japanese stocks yield more than US stocks
For the first time in decades, the dividend yield of Japanese stocks exceed the dividend yield of US stocks. As of the close on March 15th, the S&P-500 dividend yield is 1.86. After last night’s 10% decline in Japan (and the horrific catastrophe unfolding there), the dividend yield on the Nikkei-225 is now 2.02%. (The chart above shows the S&P-500 dividend yield minus the Nikkei-225 dividend yield using monthly data. It doesn’t include the post-earthquake price moves.)
Determining whether this represents an investment opportunity, or an accurate reflection of the long-term prospects for Japanese industry, is left as an exercise for the reader. Rocky notes that Japanese 10 year bonds yield 1.21% and US 10 year bonds yield 3.24% — which makes this dividend phenomenon even more striking.
[Disclosure: Rocky never provides investment advice. He will also forgo any jokes about the dismissal of the Aflac Duck because it would be inappropriate -- as the Japanese people suffer the aftermath of a historic disaster. ]
Efficient markets meet efficient yogurts
At the behest of his daughter, Rocky sampled his first “Pinkberry” frozen yogurt in New York City’s Greenwich Village on Sunday. Pinkberry has a cult following, and it was time for Rocky to audition for the cult.
The small cup of plain with two toppings cost $6.25 — and while Rocky found the concoction uninspiring — he found the profit potential intriguing.
An unscientific 10 minute demographic survey revealed all of the customers in the store were ultra-skinny women under the age of 30 and just one skinny man (whose attire and makeup were sexually ambiguous.) Judging from their fluency in Pinkberry nomenclature, all were regular customers. The tiny store was grossing over $300/hour — on a cold, rainy March afternoon!
Rocky started salivating. Not from the yogurt. From the profit potential!
But before he could grow lascivious about live cultures, Rocky looked out the window and noticed two stores across the street with “Opening Soon” banners in their window. Red Mango and “YourGurt” had Pinkberry’s prodigious profits in their sights. A frozen yogurt war would soon commence – and monopoly yogurt profits would undoubtedly become the first casualty….
[Disclosure: All that glitters isn't gold, and all that shines isn't Pinkberry pomegranate with strawberries. But the jingle is worth a listen: click here. ]
Blended whiskey meets blended crude
American v. London Crude Price
An interesting oil trade reminds Rocky of the song “America” from West Side Story (the Broadway show): “I like to be in America! OK by me in America!, Everthing free in America! For a small fee in America!”
Rocky notes the price of WTI crude oil in America is at a record discount ($15/barrel) to London’s “Brent” Crude Oil — even though the London oil is worth slightly less to refiners. Oil’s not yet “free in America,” but 17% is a remarkable discount.
Some production problems in the North Sea and an inventory overhang in Cushing, Oklahoma explain this discrepancy. Since America imports crude oil, Rocky believes it’s just a matter of time before cargos get diverted from the USA to Europe, and this price spread collapses. Hence, Rocky is slowly buying crude oil futures in America, and shorting crude oil futures in London.
If the spread doesn’t collapse in the next few months, Rocky’s Plan B is to fill his many empty Scotch Whiskey bottles with crude oil and “deliver” the recycled bottles to London…(which will also force the aribitrage to close.) Of course he’ll have to convince airport security screeners that the duty-free bottles of crude oil don’t pose an in-flight threat, and will explain that instead of a blended whiskey, it’s the ”Brent blend.” He’s also prepared to hear the TSA Agent recite Anita’s words from West Side Story: “I know a boat you can get on.” See: VLCC.
[Disclosure: Rocky never gives investment advice, and these sorts of trades entail considerable risk not to mention a nasty hangover. Nonetheless, this trade is a "Rocky V." (See "definitions" tab at the top of this page.)]
Cold comfort: natural gas glut vaporizes
Buried in yesterday’s news cycle (and Northeastern snowbanks), Rocky noticed that the widely reported “glut” of domestic natural gas inventories suddenly vaporized. Or more accurately, it oxidized.
The Department of Energy reported yesterday that Eastern US natural gas inventories are now BELOW their five-year average, and national inventories are in-line with their five-year average. See: http://ir.eia.gov/ngs/ngs.html
Rocky believes that inventories remain ample. However, a few more weeks of arctic cold weather, and natural gas consumers will feel the same chill that heating oil consumers have been experiencing.
[Disclosure: Rocky never gives investment advice, but he thinks natural gas is "cheap" compared to crude oil. But that doesn't mean the natural gas price will go up or the crude oil price will go down.... For details, see Rocky's Definitions at the top of this page under Rocky I and Rocky V. ]
Reduce the deficit: sell the White House
Zillow.Com is a nice website that “values” properties across the country. But sometimes Zillow gets a little too cheeky.
Their “zestimate” for 1600 Pennsylvania Avenue is $251,617,000. For only a monthly mortgage of $1,036,276, you can enjoy 16 bedrooms and 35 baths in this 55,000 sq. foot mansion. (Built 1752). See: http://www.zillow.com/homes/1600-pennsylvania-avenue-washington_rb/
Zillow says the White House market value declined 25 % since the peak of the housing boom. Hence Rocky believes it’s a great time for value-oriented condo-developers to swoop in. (“Great views, working fireplaces, bullet-proof windows, great yard for the kids and dogs….)
[Disclosure: Rocky continues to shop for a nice vacation home, but he hates DC's muggy summer weather.]
The Billion Price Project @ MIT : A real-time CPI
Inflation, says Rocky, are rising prices for the things that you WANT to buy. Deflation, says Rocky, are declining prices for the things that you DON’T WANT to buy.
Although it uses a more analytically rigorous definition, there are many problems with the government’s Consumer Price Index (CPI).
It’s exciting to announce that MIT has gone live with it’s “Billion Price Project” (BPP) — which monitors daily prices of 5 million items sold by 300 online retailers!
Here’s the link to the Billion Price Project: http://bpp.mit.edu/
[Disclosure: It costs the Labor Department $234 million each year to calculate the CPI, and it's only reported once each month. For more details, see: http://www.slate.com/id/2278623/ ]
Black clouds, black sheep, red ink
A friend writes: “About 18 months ago, I compiled a list of stocks for a buy-and-hold portfolio. As of today, it’s down 3.2% (excluding dividends). Going back further, my “sure-thing” portfolio is down 9.7% (excluding dividends).
Rocky notes that since December, 2008, the S&P500 has risen about 42%, and the “average” (non-market-cap-weighted) stock has gained about 75%. Interestingly, however, 57 stocks in the S&P500 have declined in price during this period!
Losing money during one of the biggest rallies in history is like walking around with a black cloud over one’s head. (A meteorological phenomonen with which Rocky is very familiar.)
In the spirit of the TV game show with-the-same-name, “The Biggest Loser” turns out to be Dean Foods Company (DF) which produces private label dairy products. Dean Foods has lost about 55% of its value during the past two years. The CEO of Dean Foods surely wishes that instead of “milking” his company dry, he had invested in the poultry business — and raised a few “golden” geese, which could have flown above the black clouds.
[Disclosure: Rocky has never invested in Dean Foods. He welcomes bad puns that involve milk companies that turn sour, but acknowledges the futility of crying over spilled milk. He also notes that investing in a "boring" S&P500 Index Fund can makes tons of hay when the sun shines.]
Don’t spend that penny all at once!
Real returns turn positive by one basis point.
When Rocky was a little kid, his miserly Uncle Scrooge would hand him a shiny penny, and intone, “Don’t spend it all at once!”
The mathematically-proficient, (but economically ignorant) child would reply, “But Uncle, how do I get change back from a penny?”
After a trip to negative 0.62%, the 5-year Inflation-Index Bond (“TIP”), closed yesterday at a whopping, positive, (drum roll please): 00.01% yield! That’s ONE BASIS POINT positive yield. Break out the champagne! Savers can now retire early! Not.
When Rocky lends money to the US Treasury, he likes to receive more money than he lends (after inflation). He’s excited that Uncle Sam will be handing him a shiny new penny!
[Disclosure: Rocky is less bearish on Treasuries. But he's not bullish on Treasuries. He also notes that his bond market strategy discussed in this post is working nicely at the moment. http://onehonestman.wordpress.com/2010/11/22/less-exposure-same-return/ ]
Garbage In => Garbage Out
Back when Rocky studied Rocket Science, a popular saying was “Garbage In = Garbage Out.” This meant that if you put silly data into a computer, the lights would flash, the drives would spin, the bells would ring, and out of the printer came: garbage.
The GIGO model came to mind when Rocky read the following e-mail from Dow Jones:
[Disclosure: Basing one's investment decisions on a real-time feed from Dow Jones New Service is reminiscent of a blind man who looks in a mirror and shaves using a straight-edge razor. As for "code words," Rocky has only one word that really matters: "Plastics."]
Less exposure, same return
The bottom green shows the 30yr/10yr yield curve steepness since 1980. It's a 3-sigma event.
For long-term investors with a dedicated portion of their portfolio in bonds, Rocky believes that there’s currently an opportunity to reduce exposure — without reducing return.
The “trick” is to extend maturities with a portion of their bonds, and to put the balance of their exposure in cash. This is called a bar-bell trade (named after the exercise equipment) — and the steepest yield curve in 30 years (see chart) provides a rare opportunity to do this trade.
Here’s an example of the mechanics.
An investor has $100,000 in the Vanguard Intermediate Term Investment Grade Bond Fund. This fund yields 3.1% and has an average duration of 5.3 years.
If the investor sells that fund, and buys $58,000 of the Vanguard Long Term Investment Grade Bond Fund which yields 5.4% with a duration of 12.9 years and puts the other $42,000 in FDIC insured money market funds yielding 1.0%, a number of virtuous things can happen:
1) If nothing happens, the cash yield of his portfolio has increased by a little bit. Before the re-allocation, his portfolio was producing $3100 in income, and now it’s producing $3500 in income.
2) The investor has increased his cash balance, and since no one really knows what the future will hold, it’s always good to have lots of cash. If interest rates rise , the investor will be able to put the cash to work at higher yields.
3) If interest rates rise, the yield curve is likely to flatten (based both on history and standard economic theory). That is, short-term rates ”should” rise more than long-term interest rates. So, even though the re-allocation results in a longer duration (7.48 versus 5.3), in most scenarios this risk is overstated. Also, the risk is lessened due to the 42% cash cushion. So the practical increase in duration should be less than the theoretical increase.
4) The investor has sold the portion of the bond market that is being levitated by the Federal Reserve and purchased a portion of the bond market which is being set by market forces. (Most of the Fed’s purchases are under 7 years in maturity.) So, when the Fed stops buying or reverses its purchases, the re-allocation should have less market risk in the short maturities that usually rise the most during tightening cycles.
5) With short rates at zero, there’s nowhere for rates to go except up. However, if the USA is in a Japanese-style depression, the only yields that can still decline are the ultra-long maturities, and one might experience a “bull market flattener”. (This is a low probability event.) Due to its modestly increased duration and position on the yield curve, the re-allocation would likely outperform nicely during a bull market flattener. Additionally, the stock market will be weak in this scenario, and the 48% cash balance might be useful for purchasing some stocks at much lower prices.
Where does this strategy look worse? If all interest rates across the yield curve move higher by the same amount , then the modestly increased duration can cause an underperformance, and if the yield curve steepens even more, there can be an underperformance. Remember: Rocky isn’t suggesting to just move out the yield curve with the same amount of money… It’s important to tuck about 48% of the portfolio away in safe money market funds . Remember also that when rates rise, bond prices decline. So if interest rates rise a lot, all bond investors will lose money. The underlying theme to this re-allocation is “less exposure — same return.”
[Disclosure: This is NOT investment advice...see the Disclaimer at the top of this page! It's just something that Rocky noticed and investors should think about. It's also an observation that the yield curve is steepest its been in 30+ years. If the 30-year bond keeps rising in yield -- and the Fed keeps rates at 0%, then this strategy will not be attractive. There's no reason to think that today marks the maximum steepness. Lastly, Rocky doesn't have an opinion about when rates will rise; but they eventually will. But as Keynes supposedly said, "In the long run, we're all dead." ]
What is QE and what it really means to me
Rocky’s read a lot of information and mis-information regarding Quantitative Easing. This may be the best and clearest discussion of the issues and is worth a read:
http://www.thebigquestions.com/2010/11/18/qe2/
[Disclosure: Rocky rarely agrees with Professor Landsburg, and finds some of his philosophies to be morally objectionable. Nonetheless, the Professor does a good job explaining the pros and cons of QE2 in his article.]
Bubbles, bubbles, everywhere…
Google Hits on "Bubble"
Rocky noticed that his friends see bubbles in bonds, in gold, in stocks, in cotton, sugar and grain prices. In fact, his friends see bubbles EVERYWHERE!
It appears that there may be a bubble in bubbles. And a look at “Google Trends” confirms this bubble. However, this bubble-in-bubbles popped early in 2010 — on the 50th Anniversary of Bubble Wrap!
See: http://www.washingtonpost.com/wp-dyn/content/video/2010/01/25/VI2010012500977.html
[Disclosure: Rocky never gives investment advice. When asked if or when the current "bubbles" will burst, he started foaming at the mouth.]
Polyester and the markets
Rocky’s eye for market trends is often sharper than his eye for fashion trends. Yet, as cotton prices reach record highs, he speculates that reasonably-priced polyester may soon come back into vogue.
Fortunately, Rocky’s wash-and-wear polyester leisure suit remains crisply pressed in the back of his closet – next to the pink ruffled tuxedo shirt which last saw action at his high school prom. (Which coincidentally was a time when gold was spiking too.) Moths find old wool suits irresistable, but just like a Hostess Twinkie, a leisure suit can remain “fresh” for thousands of years.
[Disclosure: When Rocky experiences a Saturday night fever, he takes an aspirin and goes to bed early.]
Gold-plated arbitrage
Rocky found some fool’s gold buried in today’s Producer Price Index data.
The year-over-year change in “Karat Gold Jewelry Prices” was 12.1% Whereas the year-over-year change in “Costume Jewelry Prices” was a modest 0.9%.
According to Wikipedia, “Costume jewelry (also called fashion jewelry, junk jewelry, fake jewelry, or fallalery) is jewelry manufactured as ornamentation to complement a particular fashionable costume or garment.”
Since the Government sees fit to include the “all important” costume jewelry price in the PPI, Rocky smells an arbitrage for an upcoming Trophy Wife birthday present.
Rocky currently owns gold in his investment portfolio, but this price discrepancy suggests that he should consider a “short gold / long fake gold” swap for Trophy Wife’s jewelry box portfolio.
[Disclosure: As they say on TV: "We're trained professionals. Don't try this yourselves at home!]
